Is the Health Care system on the rocks?
Reduced Medicare payments, lower payroll tax collections, and scandals among drug makers might make you think so. In the wake of the health care debates, the health care sector declined about 5%. Many investors have all but written off the entire industry.
But is that reasonable? Health care is an essential service. Sure, some optional procedures, like cosmetic surgery, have suffered during the recession, but overall, demand has been solid. Since the recovery began a year ago, expenditures on healthcare have grown 3.7%.
But will health care reforms impact the sector? Sure. The prospect of reduced Medicare reimbursement along with increased scrutiny of company profits has many predicting that health care would be the new tobacco stocks in the coming years. Remember that cigarette companies have had to pay out billions since the states sued them in the early ‘90s.
But what happened after that? Tobacco stocks were punished as investors questioned the industry’s long-term solvency, but they’ve done extremely well since then, returning 15-20% per year since the full settlement was worked out. A 10,000 dollar investment in Phillip Morris back then is now worth over 100,000 dollars.
Health care is an indispensable product that more people will buy more of down the line. In spite of the uncertainty, health care has a healthy future.
Douglas R. Tengdin, CFA
Chief Investment Officer
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